Compliance Digest - 22nd March 2024
Welcome to this week’s compliance digest. The FCA has been busy this week. It has published its business plan for 2024/25, and the results of its retirement income thematic review with the TR24/1 and a Dear CEO letter. With lots to think about, I have focused on these two publications.
FCA Business Plan 2024/25
FCA asks Financial Advisers to review their processes in retirement income support
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FCA Business Plan 2024/25
The FCA launched its 2024/25 Business Plan this week with a press release written by Nikhil Rathi. The Business Plan builds on the FCA’s three-year Strategy published in 2022.
The 2024/25 strategy has 13 public commitments, the top three being:
Reducing and preventing financial crime The FCA notes that it has published two national strategic documents in the last 12 months – The Economic Crime Plan and the Fraud Strategy – and confirms that it will continue to take a data-led approach to identify potential harm for supervisory and enforcement action. As such, the Business Plan flags that in 2024/25 the FCA will increase its investment in its systems so that intelligence and data is used more effectively within its financial crime work, in order to target higher risk firms and activities. It commits to continuing to take assertive action to tackle scams and fraudulent websites and to work with partners to support system-wide improvements, as well as using its powers through the Office for Professional Body Anti-Money Laundering Supervision to improve standards in the legal and accountancy sectors.
Putting Consumers’ interests first The Consumer Duty, again. The FCA intends to continue testing whether firms are meeting the high standards set by the Consumer Duty, which it notes has already led to firms making changes to savings rates and advice fees. The Business Plan also explains that the FCA will seek to support consumers’ long term financial wellbeing through the Advice Guidance Boundary Review and making sure pension products deliver value for money. Another key FCA activity in this respect is its multi-firm work and market studies across different sectors to drive up standards, which will start in 2024/25. This will include looking at unit-linked pensions and long-term savings products to test the transparency of charges across value chains, how firms assess overall product value and their response where they identify unfair value. The multi-firm work will also look at how swiftly the insurance industry responds to claims, including where customers are more likely to show characteristics of vulnerability. The FCA will also begin a review of firms’ treatment of customers in vulnerable circumstances in 2024/25.
Strengthening the UK’s position in global wholesale markets The FCA wants the UK to continue to strengthen its position in global wholesale markets and also to host markets which support the domestic economy and growth. It wants markets which are open to innovation, underpinned by high standards of market integrity and investor protection.
Alongside the Business Plan, the FCA has also published three new webpages:
The FCA’s approach to supervision, which sets out how it carries out its regulatory oversight including its rationale for supervision, how it supervises, its supervisory principles and its decision-making framework.
The FCA’s approach to consumers, which covers how it uses its powers and tools to protect consumers of financial services, in line with the FCA’s consumer protection objective.
The FCA’s approach to competition, which explains the FCA’s objectives and duty in relation to competition, how it identifies potential harm caused by a lack of competition, how it diagnoses the cause of such harm, potential remedies and how it measures the impact of its work.
The FCA’s approach to international firms, which sets out the standards expected from international firms that provide financial services in the UK, or that are preparing to apply for full UK authorisation.
Data will be at the heart of the FCA’s approach to supervision, it will expect firms to be able to demonstrate how they are meeting the regulator’s expectations with robust and reliable record keeping.
FCA asks Financial Advisers to review their processes in retirement income support
A press release heralds the publication of a Dear CEO letter and Thematic Review TR24/1 the retirement income advice thematic review. This is a summary of the results of last year’s thematic review of retirement income advice across the industry.
The review identified examples of good practice in the market with some firms showing they had considered their customers’ needs and designed their advice model in a way likely to lead to good outcomes. Some firms had clearly detailed processes, specific training on decumulation and used a range of tools to help illustrate complex information for customers.
However, the FCA also found some examples where firms were not taking account of the needs of their customers. This included where firms operated in a way unlikely to lead to good customer outcomes by not considering a sustainable level of income to support retirement and some instances of firms not providing the right information to customers. Most of the advice files the FCA reviewed showed advice provided was suitable. However, in a small number of instances recommendations resulted in consumers losing guarantees or incurring unnecessary charges.
Key areas for improvement were identified as:
The approach to determining income withdrawals was applied without taking account of individual circumstances, or based on methods and assumptions that were not justified or recorded.
Risk profiling was not evidenced, was inconsistent with objectives and customer knowledge and experience, or lacked consideration of capacity for loss.
Failure to get necessary information about customers to demonstrate advice suitability, including expenditure or other financial provision, or not exploring future objectives or circumstances, including income needs or lifestyle changes.
Periodic review of suitability, where relevant, was not always delivered to customers that had paid for ongoing advice.
Inaccurate or insufficient records held as the control framework to enable customer outcomes to be assessed and track whether periodic review services were delivered.
The publications associated with the thematic review included the use of cash-flow modelling to demonstrate the suitability of retirement related advice. Whether or not you use cash-flow modelling in your firm, this is a clear indication that the FCA expects firms to use a tool to demonstrate the sustainability of decumulation advice where the client draws on invested assets to fund their retirement lifestyle.
Ian Ashleigh
